Under its current form, that is imperialism-controlled, debt is a cleverly managed re-conquest of Africa, aiming at subjugating its growth and development through foreign rules. Thus, each one of us becomes the financial slave, which is to say a true slave.- Thomas Sankara
Several African countries have a significant problem. They are highly indebted, in a post-covid low growth global economy, with high inflation driven by wars and broken supply chains. Many African states are unable to effectively deal with the lack of growth or cushion people from inflation. All because the hangover of the pre-covid debt binge has left us without fiscal space.
I say ‘our’ because my country, Kenya, is heavily indebted and desperately trying to avoid a default. As a result, I have watched the debt restructuring processes in Zambia and Ghana closely, as it is not unlikely that the same process will be dominate headlines in Nairobi. It is clear from the example of Zambia and Ghana, that we must rethink our approach to debt restructuring if we are going to dig ourselves out of this debt hole.
What’s going on in Ghana & Zambia
Like much of the rest of the continent Ghana and Zambia borrowed from mix of creditors. Domestic and international bondholders, syndicated loans from banks, concessional lending from development institutions, bilateral lending from foreign governments and commercial loans from state bank Chinese enterprises.
Thus unlike the debt jubilee of the early 2000’s African debt forgiveness is not a simple matter of getting it onto the agenda of a G8 meeting. You must bring all these various stakeholders, with wildly different interests, and sometimes open hostility towards each other, to the table to restructure interest and principal payments.
Unfortunately, as we can see in Ghana and Zambia these various interests combine to make a restructuring process a near impossible slog. Large IMF bailouts (often the goal of the restructuring process) is conditioned upon consensus among the majority of creditors. However, the bondholders won’t even come to the table, the Chinese (bilateral and development) can’t agree with the west, and the world bank and commercial Chinese lenders are unwilling to take terms worse than governments or bondholders. So they get stuck in limbo, both Zambia and Ghana have defaulted, but neither are anywhere near a satisfactory outcome to restructuring negotiations with their creditors.
A different approach
It’s a clear signal to the rest of the continent that we must approach this differently. African countries must restructure their debt because we need the fiscal space to invest in our countries and drive growth. We need the fiscal space to cushion citizens from the soaring cost of living. What use is a government that just pays your tax money to other people.
- Start talking now.
If you wait for default before you start negotiating with your creditors, it is too late. It Is crucial to sit down with your creditors before it is a crisis to restructure loan terms. If the context of a restructuring is a fiscal strategy when you are solvent rather than a crisis, your negotiating partners will be much more open to engagement. Not all of these talks will be successful, but some will be and every bit helps.
- Tax reform
Fundamentally only two things will get you out of a debt hole. Economic growth and revenue growth. Our complex, badly policed tax systems leak revenue and offer opportunity for corruption, while also limiting growth through encumbering businesses with unnecessary rules and compliance costs or having to pay bribes. Tax reform does not mean increasing taxes, all that will do is punish existing taxpayers. Rather African governments can aim for three things.
- Close compliance gaps – there are lots of people who should be paying taxes who aren’t. Bringing them into the tax system is a quick and painless way to bring in additional revenue.
- Create an easy, affordable, and painless pathway for the informal sector to become formal taxpaying businesses, to broaden the taxbase over the long term.
- Broad tax reform that is aimed at closing loopholes and exemptions, getting our fair share from extractive multinationals, a pan-African framework for dealing with multinationals and creating a stable, predictable environment that local
Tax reform is critical to jumpstarting our economies with organic indigenous growth and increased tax revenues will give any country more room to negotiate in a debt restructuring process.
- Tap into domestic capital.
One of the causes of the current crises is that African countries binged on “cheap” foreign debt. This should be a lesson to African countries that we must tap into more African capital. It is much better to borrow in our own currencies from our own people. To do so African countries need to create attractive long term bonds and investment instruments that people can invest in or even swap short term debt for. In addition, African countries should look in to the creation of diaspora bonds, aimed at tapping the pool of capital built by citizens living abroad.
- Communicate
I have written previously that good communication is good policy. This is doubly true when it comes to capital markets. They must believe the credibility of your policies and plans, to buy into a restructuring process. This means communicating at all levels. Through policy documents, high-level bilateral engagements, public forums, the press, public education etc. You must explain reinforce, repeat, and defend your strategy to the point that it becomes the dominant narrative. You must engage your key stakeholders (such as creditors, IMF and World Bank board members, key foreign governments, etc.), often, in person and with credible high level representatives so they are personally sold and invested in your success.
A lack of communication creates information black holes and erode any confidence in whatever restructuring plans you may have. Markets are fickle things, and capital is cowardly. A lack of confidence has plunged countries towards crises, a recent stark example being the short lived prime-ministership of Liz Truss in the UK.
Restructuring debts smartly
It is exhausting. African governments have been here before. Borrowed large amounts of money from foreign creditors, to fund development that doesn’t quite happening and end up endangering their own solvency.
The last time this happened, Africa got a debt Jubilee. That will not happen this time. The nature of our creditors and debt has changed. Our only viable pathway is to embark on debt restructuring processes that will save us from bleeding ourselves dry to pay debts rather than fund development. It won’t be easy, and we will have to pay, but a reformulated approach to restructuring could make that payment less painful and give us the space to grow.
Also published on Medium.